Budgeting By Lisette T. Jacobson, MPA, MA, PHR

University of Kansas School of Medicine - Wichita

2011 Kansas Public Health Association Fall Conference

Importance of a budget and its functions Legal requirements, budget content, and structure Elements of a budget Types of budgets Types of budget format

◦ Line-item◦ Program-based◦ Performance-based

Budget analysis◦ Variance◦ Percent change (including Annual Compound Growth Rate)◦ Budget shares

Today’s Agenda

A spending plan based on expected revenue and the setting of priorities for the quantity and quality of services to be provided (Ulbrich, 2003)

Development of budget depends on:◦ A revenue plan – includes forecast of revenues available

from existing sources and proposed changes to the revenue system

◦ Expenditures – forecasts and requests from departments for continuing funding and new projects

◦ A procedure for dealing with gaps between revenues and expenditures (e.g. how best to use a surplus or address a deficit)

What is a budget?

Budgeting – to allocate resources Accounting – to assemble, analyze, classify, and

record data affecting an organization’s financial position

Financial reporting – to make accounting data available to users in a timely format

Auditing – to ensure accounting and financial reporting elements are operating properly

Fiscal year – the 12-month period of time after which we determine financial position and results

Terminology

The Balance Sheet/Statement of Net Assets◦ Shows elements of a “snapshot” of resources (for example, as

of the last day, 12/31, of FY11) Assets - what is owned (e.g., cash, receivables, fixed assets) Liabilities – what is owed to outsiders (e.g., payables, debt) Equity – what is owned without claim

The Flow Statement◦ A “flow” statement is needed to show all financial activity

during the reporting period (e.g., Jan. 1 to Dec. 31): Statement of Revenues, Expenditures, and Changes in Fund

Balance (e.g., surplus or deficit) In government, may also be referred to as “Statement of Activities” In business, is referred to as “Income Statement”

How is a budget different from a financial statement?

Plan – sets out a design with price tags

Economics – influences economic behavior

Decision process – requires choices

Behavior – (stressful) goal-directed behavior

Contract – involves mutual obligations

Culture – taps into organizational preferences

Politics – expressions of power

What is a budget?

Four primary functions (as defined by the Government Finance Officers Association (GFOA) Distinguished Budget

Presentation Awards Program criteria, www.gfoa.org) ◦ A policy document

◦ A financial plan

◦ An operations guide

◦ A communications device

Functions of the Budget

Policy document - ◦ Requires an executive budget summary; long-term financial

policies and priority issues for upcoming fiscal year; definition of a balanced budget; budget message should describe changes in priorities, issues facing the organization, and actions taken

Financial plan –◦ Requires a summary (an overview of all funds, revenues, and

expenditures); each fund specifies revenues and expenditures; projected changes in fund balance; debt policy; basis of accounting and budgeting; description of each major fund; and capital expenditures (must be a separate section)

Functions of the Budget (cont’d)

Operations guide -◦ Requires description of each department’s function and service;

includes departmental performance indicators and how well these line up against their goals and accomplishments over prior, current, and upcoming years; includes org. chart and schedule of personnel

Communications device -◦ Requires overview of the budget process and amendment

procedures; includes letter of transmittal; illustrates complex financial and statistical information in charts, graphs, and tables; executive summary includes major budgetary resources, issues, and trends; includes a glossary of specific terminology, statistical data regarding demographics of the organization/community, current state of economy, education, local history, etc.

Functions of the Budget (cont’d)

The GFOA Distinguished Budget Presentation Award has been awarded to:

◦ Sedgwick County – each year over the last 26 years◦ City of Wichita – each year over the last 22 years◦ Wichita Public Schools (USD 259) – each year over the

last 16 years

What is the point of all this?

Who received this award?

So, now that we know why becoming familiar with the budgeting process is important, what all does a budget entail and how do we analyze it?

A budget document must conform to the law Some state governments require specific financial

information in the budget and may provide forms on which local budgets are to be filled out

Requirements included in state laws have served mainly as a minimum for budget documents

Once local governments have complied with state law, they are free to set up more sophisticated budget systems if they wish

Legal Requirements

Letter of transmittal or a budget message Table of contents Introduction Summary tables showing the balance of revenues

and expenditures for each fund A detailed section on expenditures for each fund A detailed section on projected revenues A section on capital outlays and debt Supporting material

Overall Budget Content and Structure

Revenues – who pays Expenditures – who benefits Result –

◦ Balance: yearly revenues equal expenditures◦ Deficit: yearly shortfall of revenues to expenditures◦ Debt: cumulative deficits covered by borrowing◦ Surplus: yearly excess of revenues

Budget Elements

Annual operating budget◦ Yearly plan for regular and recurring expenditures

(consumption)

Capital budget◦ The first year of a plan for non-recurring outlays

providing benefits for several years (investment)

Unified budget

Types of Budgets

Line-item budget

Program-based budget

Performance-based budget

Types of Budget Format

A budget format where departmental expenditures are grouped according to the items that will be purchased, with one item or group of items on each line

Allows for the comparison of items’ cost to the cost of similar items purchased elsewhere, which helps determine whether a funding request was too high

Detailed line items have often given way to aggregated functional categories such as personnel services, supplies and materials, capital expenditures, internal services, etc.

Line-Item Budget

Health Department

Personnel Services $ 50,000Supplies $ 20,000Services $ 25,000Capital outlays $ 5,000Total $100,000

Focus: Category of spending

Line-Item Budget (cont’d)

Organizes budgetary information and allocates funds along program rather than departmental lines

Emphasizes quality and cost of services – focus is on program outputs/outcomes and maintenance

Is often accompanied by performance measures When program budgeting and performance

measures are linked this way, then a “work plan” is incorporated into the budget!

Program-based Budget

Program-based Budget (cont’d)

Health Department

Administration/leadership $ 10,000Preventive Health Services $ 25,000Family Health $ 60,000Health Education $ 5,000Total $100,000

Focus: Task to be accomplished

Includes performance goals and objectives Includes demand, workload, efficiency, and

outcome/impact measures for each program Provides a basis for comparing cost and quality of

services Provides a “running” check on whether programs

achieve their goals Uses performance measures Negotiates objectives using MBO philosophy Ties and ranks objectives to strategic plan Line managers may have more discretion

Performance-based Budget

Types of performance indicators

◦ Inputs (resources used): dollars, staffing, materials

◦ Demand for service: number of flu shots given

◦ Workload: number of nurses involved with giving flu shots

◦ Productivity: cost per flu shot, labor cost per flu shot

◦ Effectiveness (impact/outcome): fewer people admitted to hospital because of flu symptoms

Performance-based Budget (cont’d)

Health Department

Year 1 Year 2 Budget

Total cost $26,000 $37,000 $35,000

Number of shots 12,000 10,000 10,000

Unit cost/shot $2.17 $3.70 $3.50

Focus: Cost of performance

Performance-based Budget (cont’d)

“Budget format influences budget deliberations that influence budget allocations that, in turn, influence program outcomes” (Gloria A. Grizzle, 1986)

Expenditure (cost) analysis – metrics to use:

◦ Variance analysis

◦ Percent change analysis

◦ Budget shares analysis

Revenue analysis◦ May use similar types of metrics as in the expenditure

analysis

Budget Analysis

From service provision to cost of provision

From budget compliance to cost of service

Shift in Thinking

Variance Analysis

Variance analysis – assesses how much the actual utilization of funds varies from the budgeted amount → It tells you whether you are over or under budget!

Formula:

Actual Amount

Budgeted *100%

Attempts to answer the following questions:

◦ Is the difference consistent across time?

◦ Does the difference appear to be related to particular activities?

Percent change – assesses how much the budgeted amount varies from previous years → It tells you whether you have an upward or downward trend!

Formula:

Current Budget – Previous Budget

Previous Budget *100%

Percent Change Analysis

Can also be analyzed through calculation of the Annual Compound Growth Rate (ACGR)

Formula:Most recent time period divided byOldest time periodRaised to the power of (1/t)Minus 1Or(recent/oldest)(1/t) - 1

Where t is the time period or “book ends”

Percent Change (cont’d)

Compound Growth

Period 1 Period 3 Growth RateX $100 $120 9.54%*Y $210 $200 -2.41%Total $310 $320 1.60%

Formula: (recent/oldest)(1/t) – 1• With t = 2, then (120/100)(1/2)-1; then (1.2)(.5)-1; then

(1.0954)-1 = 0.0954; then 0.0954 times 100% = 9.5445% as the yearly growth rate

Percent Change (cont’d)

Budget shares – assesses how much of the budget is allocated to each cost center → It tells you what cost center “carves out” the largest or smallest piece of your total budget!

Formula:

Individual expenditure by program/division Total amount of expenditures

*100%

Budget Shares Analysis

To determine trends (upward or downward) Expenditures

◦ To determine whether we are over/under budget◦ To determine what takes up the largest/smallest piece of the

budget Used to forecast revenues Remember the 4 functions that budget documents serve:

◦ A policy document

◦ A financial plan

◦ An operations guide

◦ A communications device

Overview - Why Conduct an Expenditure and Revenue Analysis?

Questions?

Thank you!!